Are you looking for a cheap but fundamentally strong TSX stock to own for the long term that has the potential to yield strong returns on investments? If so, you might want to consider Air Canada (TSX:AC) stock, which is currently trading at a massive discount compared to its pre-pandemic value and has the potential to recover.
In this article, I’ll try to answer the question of where Air Canada’s stock might be in three years based on its current financial position and fundamental factors that could impact its stock price movement in the coming years.
Why Air Canada stock looks undervalued to buy now
For some context, let’s start by exploring the key negative factors that led to massive declines in Air Canada stock’s performance in the last few years. A big selloff in the shares of the largest Canadian passenger airline company started in early 2020 after the COVID-19 pandemic hit the global aviation industry, forcing airlines to suspend most of their flights. Investors feared that Air Canada would face a prolonged period of low air travel demand, high costs, and huge losses, triggering a selloff in Air Canada stock. And investors weren’t completely wrong, as the company posted an adjusted net loss of nearly $4.2 billion in 2020. As a result, Air Canada stock dived by around 53% that year to $25.74 per share, posting its worst performance after 2011.
In the next couple of years, Air Canada took several key measures to trim its cash-burn rate and improve liquidity by cutting costs and adapting to the changing market conditions. These measures helped the airline company reduce its yearly adjusted net losses to less than $1 billion in 2022.
As international air travel demand also showed a strong rebound in 2023, Air Canada’s financials started to improve rapidly. As a result, the Canadian flag carrier’s 2023 revenue of $21.8 billion exceeded its pre-pandemic year 2019 revenue figure of $19.1 billion. Despite that, Air Canada stock has continued to slide each year since 2020. It currently trades at $18.14 per share with a market cap of $6.5 billion, down around 63% from 2019’s closing level of $40.51 per share.
And if you think that despite stronger revenues, investors might still be worried about its profitability, you might be surprised to know that Air Canada’s adjusted earnings stood at $4.56 per share in 2023, much better than its 2019 earnings of $3.37 per share. Similarly, its adjusted net profit margin expanded to 7.8% in 2023 from just 4.8% in 2019. This clearly reflects that the company was able to generate more earnings per dollar of revenue in 2023 than it did before the pandemic. Given these factors, Air Canada stock appears way too undervalued to buy for the long term.
Where will Air Canada stock be in three years?
High interest rates and inflationary pressures have badly affected the global economy and the consumer spending environment in the last two years. Fears that these economic challenges might affect air travel demand could be the main reason why Air Canada stock hasn’t been able to recover so far in the post-pandemic era.
Nonetheless, we shouldn’t forget the fact that inflation has already started showing early signs of easing across North America. This fact raises the possibility that central banks in the United States and Canada will soon start easing their monetary stance by cutting interest rates, which could boost consumer confidence and travel demand further in the near term. That’s why I wouldn’t be surprised if Air Canada stock more than doubles in value in the next few years.
